A lender for a Town of Tonawanda apartment complex whose owner is at the center of a federal mortgage fraud investigation wants to foreclose on the property after an auditor determined it also received false information.
SteepRock Capital, in court documents, called loans for Raintree Island Apartments "toxic" because of the criminal case and accused the owners of providing "completely inaccurate" information contradicted by internal financial records.
SteepRock Capital wants to seize and sell Raintree Island off Colvin Boulevard, as well as two other multifamily properties in the Syracuse suburbs, after an independent audit of financial statements showed Morgan Management and its companies "consistently overstated revenues and operating income" for the three properties.
Two executives of Rochester-based Morgan Management, Kevin and Todd Morgan, and two Buffalo-area brokers were indicted in May on federal charges accusing them of conspiring to defraud financial institutions.
In court documents, attorneys for SteepRock alleged that the Morgan companies "outright lied" to the lender about key financial metrics for each of the three properties to convince SteepRock to make loans that it otherwise would not have.
"Given the criminal conduct apparently at issue in this case, the loans are toxic," attorney John P. Doherty wrote in a legal memo on behalf of SteepRock Capital. Doherty said SteepRock has "unexpectedly had to deal with investor concerns and reputational risk, risk of senior lender enforcement actions that could wipe out its interest, and the Federal Bureau of Investigations" because it made loans unaware of the "fraudulent scheme."
The documents were filed in response to a lawsuit by the Morgan companies to block the foreclosure.
The company's president, Robert C. Morgan, had not been charged in the case. But his son and nephew, Todd and Kevin Morgan, are accused, along with brokers Frank Giacobbe of East Amherst and Patrick Ogiony of Buffalo, of conspiracy to commit wire fraud and bank fraud, as well as other charges. Federal prosecutors accused them of using fake leases and other tactics to trick banks into lending far more on several apartment properties than the properties were actually worth.
Kevin Morgan on Friday pleaded guilty to one felony charge for conspiracy to commit bank fraud. He could serve up to five years in prison.
Federal prosecutors have previously indicated they are still investigating the case.
SteepRock, in the recent court documents, said it, too, believes it was intentionally given false information.
"This was a clear pattern and practice over a number of years," SteepRock Managing Partner John Bucci said in an affidavit accompanying Doherty's memo. "Had Plaintiffs provided accurate financial information to SteepRock, we never would have loaned Plaintiffs any money."
Robert Morgan, in seeking a temporary restraining order to stop the quick foreclosure, rejected the assertions and alleged that SteepRock has not suffered any loss, according to his lawsuit filed in State Supreme Court in Manhattan.
Attorneys for Morgan's companies noted they have made every payment to SteepRock, submitted quarterly financial statements and other information as required, and have "responsibly managed and operated the Raintree Apartments, as evidenced by a strong occupancy."
They also alleged that SteepRock has not laid out any evidence or identified any documents as "false or misleading," but just asserted the default "based on nothing more than this vague allusion to unidentified statements."
SteepRock responded with voluminous documents and affidavits, including a detailed forensic analysis of the three properties by Amherst accounting firm Chiampou Travis Besaw & Kershner, which found significant discrepancies between internal files and those reported to SteepRock. In the case of Raintree, for example, net operating income was overstated by about $2 million over four years, according to the analysis.
The judge, following a hearing Monday, sided with the Morgan companies and granted a 60-day restraining order. But he ordered the parties to return to court March 26.
The assertions by the New York City-based lender largely mirror the criminal fraud indictments filed in May against the two Morgan Management executives and two Buffalo-based mortgage brokers. SteepRock officials noted that they dealt with the same individuals in 2013 and 2015 while negotiating the loans for the three properties.
Authorities said at the time of the indictments that their investigation would continue, and SteepRock said in its court filing that it received a subpoena in September 2018. The firm provided documents to the FBI and the Federal Housing Finance Agency's Office of Inspector General, while Bucci was interviewed by FBI and OIG investigators.
The Buffalo News reported in late 2017 that the Morgan companies were under investigation by the FBI and U.S. Attorney's Office and that questions had been raised about the way they had acquired and financed the Raintree complex, as well as other properties.
In all three of its loans, SteepRock was not the primary lender, but rather provided supplemental credit on top of the primary mortgage. In the case of Raintree, Morgan's company borrowed $27.8 million from UBS to finance the purchase of the apartment complex, plus an additional "mezzanine" loan of $2.7 million from SteepRock, for a total of $30.5 million.
But according to SteepRock, the property was actually worth $35 million, not the $42.34 million Morgan's company had originally asserted.
Upon learning the new information, SteepRock last month sent notices of default to Morgan and demanded full repayment of the loans, plus a default premium, interest and legal fees. In the case of Raintree, that totaled $4.875 million.
Similar notices were sent for the other two properties, Brookwood on the Green Apartments in Clay and Rivers Pointe Phase II in Liverpool. Both are in Onondaga County. SteepRock loaned $2 million on Brookwood and $3 million for Rivers Pointe, and is now demanding full payment of $3.8 million and $5.79 million, respectively.
In the notice, SteepRock declared that Morgan has been in default "since the date of origination of the loan as a result of certifications, representations or warranties made by borrower or guarantor in financial statements furnished by borrower to lender being false or misleading in a material respect."
SteepRock "scheduled the sale because they learned Plaintiffs had provided falsified financial information to make the properties look far more favorable at the time Plaintiffs loans were originated," Doherty wrote in his memo to the State Supreme Court.
For example, Doherty noted in his memo:
- The actual net operating income at Raintree when the loan was made was $1.97 million - not $2.7 million as Morgan had claimed. So the total loan amount was 120 percent of the property's value, not 85 percent as Morgan asserted.
- At Brookwood, net operating income was inflated by nearly half, to $1.83 million, when it was really $1.23 million. The loan-to-value ratio, similarly, was 106 percent, not 70 percent as originally stated.
- And at Rivers Point, the income was cited as $2.5 million, when it was actually $1.19 million. And the loan-to-value ratio was 167 percent, not 79 percent as Morgan asserted.
SteepRock's independent auditor "confirmed in October 2018 that the financials Plaintiffs had provided to SteepRock were completely inaccurate and were not in agreement with Plaintiff's internal financial records."
The battle with SteepRock is the latest challenge for Morgan's companies, which have amassed a portfolio of more than 36,000 apartments in 14 states, including more than 3,500 in the Buffalo area.
But its financing methods - often borrowing more than a property's purchase price or value - began to draw the scrutiny of the FBI and the U.S. Attorney's Office, which launched an investigation focused on the financial statements, rent rolls and other documents the companies provided to lenders to justify mortgages.
The FBI raided Morgan Management offices in the Rochester suburb of Pittsford last May. And prosecutors that month issued fraud indictments against Kevin and Todd Morgan – Robert Morgan's nephew and son – as well as against two mortgage brokers, Frank Giacobbe and Patrick Ogiony of Aurora Capital Advisors in Buffalo. The four were charged with 62 counts of bank and wire fraud for allegedly falsifying income data to obtain $167.5 million in loans on seven properties.
In the court documents, Bucci identified Giacobbe as the broker who approached SteepRock on behalf of Morgan in 2013.
As the investigation unfolded, Morgan's companies then "began sending accurate financial statements that raised red flags, because they were considerably worse than previous financial statements," Doherty wrote. Bucci confronted company executives, who "did not deny that all financial reporting to SteepRock prior to 2017 was false."
That's when SteepRock hired Chiampou to the auditor. And after receiving the audit report from Chiampou, "SteepRock took immediate action to protect its interests and to move forward," contacting its investors and hiring attorneys, Doherty wrote.